SEC Votes to Propose Rule Amendments to Facilitate Rights of Shareholders to Nominate Directors
Today, the Commission voted to propose a comprehensive series of rule amendments to facilitate the rights of shareholders to nominate directors on corporate boards.
"This proposal represents nearly seven years of debate about whether the federal proxy rules should support - or stand in the way of - shareholders exercising their fundamental right to nominate directors," said SEC Chairman Mary Schapiro. "Today marks the first step toward finally concluding that debate. While I recognize that there are passionate views on both sides of this issue, I hope that all interested parties will participate in the Commission's comment process. I am confident that the final rules we adopt will be better because of these comments."
Public comments on these proposed rule amendments must be received by the Commission within 60 days after their publication in the Federal Register.
The nation and the markets are experiencing one of the most serious economic crises of the past century. This crisis has led many to question whether boards of directors are truly being held accountable for the decisions that they make. These concerns include questions about whether boards are exercising appropriate oversight of management, whether boards are appropriately focused on shareholder interests, and whether boards need to be held more responsible for their decisions regarding such issues as compensation structures and risk management. Because of these concerns, the Commission has decided to revisit whether and how the federal proxy rules may be impeding the ability of shareholders to exercise their fundamental right under state law to nominate and elect members to company boards of directors.
Today, public companies across the country hold elections to select members of their boards of directors, which oversee the management of the company. In most cases, the existing directors nominate the slate of candidates and the company sends information to the shareholders, through so-called proxy materials, so those shareholders have information to vote their shares.
But, because the shareholders rarely have any input into the slate of candidates, they are not always able to vote for the person they believe may be best suited to fill the post.
In many situations, companies permit shareholders to show up to the annual shareholder meeting where the election occurs and nominate different candidates than the ones on the ballot. But, by then it is too late to be meaningful because the proxy votes will have already been cast.
As a result, shareholders who wish to nominate their own candidates today must launch a proxy fight in which they mail out their own ballots - an extremely costly process.
Congress gave the Commission authority over the corporate proxy process as a means of ensuring that it functions, as nearly as possible, as a replacement for an actual in-person meeting of shareholders. Refining the proxy process so that it replicates, as nearly as possible, the annual meeting is particularly important given that the proxy process has become the primary way for shareholders to know about the matters to be decided by the shareholder and to make their views known to company management.
To address this situation, the Commission is proposing rule amendments that would provide shareholders with a meaningful ability to exercise their state law rights to nominate the directors of the companies that they own. Under the proposal, shareholders who otherwise are provided the opportunity to nominate directors at a shareholder meeting would be able to have their nominees included in the company proxy ballot that is sent to all voters. Shareholders would also have the ability to use shareholder proposals to modify the company's nomination procedures or disclosure about elections, so long as those proposals do not conflict with state law or Commission rules.
Getting Nominees Included in the Company's Proxy Materials:
New Exchange Act Rule 14a-11 - shareholders could, under certain circumstances, include a nominee or nominees for director in company proxy materials
Under the proposed rule, certain shareholders would be able to include their nominees for director in the company's proxy materials unless the shareholders are otherwise prohibited - either by applicable state law or a company's charter/bylaws - from nominating a candidate for election as a director.
The proposed rule would apply to all Exchange Act reporting companies, including investment companies, other than debt-only companies.
Which shareholders would be able to have their nominees included in the proxy materials?
Shareholders would be eligible to have their nominee included in the proxy materials if:
Shareholders would be able to aggregate holdings to meet applicable thresholds.
Shareholders would be required to have held their shares for at least one year.
Shareholders would be required to sign a statement declaring their intent to continue to own their shares through the annual meeting at which directors are elected.
Shareholders would be required to certify that they are not holding their stock for the purpose of changing control of the company, or to gain more than minority representation on the board of directors.
What requirements would a shareholder's nominee be required to meet to be nominated?
The nominee's candidacy or, if elected, board membership must not violate applicable laws and regulations.
The nominee must satisfy objective independence standards of the applicable national securities exchange or national securities association.
The nominating shareholder may have no direct or indirect agreement with the company regarding the nomination of the nominee.
How many board nominees for director would a shareholder be able to include in company proxy materials?
No more than one shareholder nominee, or a number of nominees that represents up to 25 percent of the company's board of directors, whichever is greater. (For example, if the board is comprised of three members, one shareholder nominee could be included in the proxy materials. If the board is comprised of eight members, up to two shareholder nominees could be included in the proxy materials.)
What would have to be disclosed about nominating shareholders and their nominees?
The nominating shareholder would be required to file with the Commission and submit to the company a new Schedule 14N. The Schedule 14N would require disclosure of the amount and percentage of securities owned by the nominating shareholder, the length of ownership, and intent to continue to hold the securities through the date of the meeting. The Schedule 14N would require a certification that the nominating shareholder is not seeking to change the control of the company or to gain more than minority representation on the board of directors.
The company would include in its proxy materials disclosure concerning the nominating shareholder, as well as the shareholder nominee or nominees, that is similar to the disclosure currently required in a contested election.
Would the nominating shareholder be liable for information provided to the company?
As is the case when directors nominate candidates, the nominating shareholder or group would be liable for any false or misleading statements in information provided to the company that is then included in the company's proxy materials.
The proposed rule would provide that the company will not be responsible for information provided by the shareholder, unless the company knows or has reason to know the information is false.
Allowing Shareholders Proposals:
Amended Exchange Act Rule 14a-8(i)(8) - shareholders could require companies, under certain circumstances, to include proposals in their proxy materials that would amend, or request an amendment to, the company's governing documents to address the company's nomination procedures or other director nomination disclosure provisions that do not conflict with the Commission's rules.
Currently, Exchange Act Rule 14a-8(i)(8) permits companies to exclude shareholder proposals that "relate to an election." Under the proposal, this so-called "election exclusion" would be narrowed, thereby allowing in the proxy materials more shareholder proposals regarding elections. Specifically, shareholder proposals by qualifying shareholders that would amend, or that request an amendment to, provisions of a company's governing documents concerning the company's nomination procedures or other director nomination disclosure provisions (so long as those disclosure provisions don't conflict with proposed Rule 14a-11 above) would not be excludable.
Which shareholders would be able to submit a shareholder proposal?The current eligibility provisions of Rule 14a-8 would continue to apply. Those provisions require that a shareholder proponent have continuously held at least $2,000 in market value (or 1 percent, whichever is less) of the company's securities entitled to be voted on the proposal at the meeting, for a period of one year prior to submitting the proposal.
(Press Rel. 2009-116)
SEC Suspends Trading in the Securities of Thirteen Issuers for Failure to Make Required Periodic Filings
The U.S. Securities and Exchange Commission announced the temporary suspension of trading in the securities of the following issuers, commencing at 9:30 a.m. EDT on May 20, 2009 and terminating at 11:59 p.m. EDT on June 3, 2009:
The Commission temporarily suspended trading in the securities of these thirteen issuers due to a lack of current and accurate information about the companies because they have not filed periodic reports with the Commission in over four years. This order was entered pursuant to Section 12(k) of the Securities Exchange Act of 1934 (Exchange Act).
The Commission cautions brokers, dealers, shareholders and prospective purchasers that they should carefully consider the foregoing information along with all other currently available information and any information subsequently issued by this company.
Brokers and dealers should be alert to the fact that, pursuant to Exchange Act Rule 15c2-11, at the termination of the trading suspensions, no quotation may be entered relating to the securities of the subject company unless and until the broker or dealer has strictly complied with all of the provisions of the rule. If any broker or dealer is uncertain as to what is required by the rule, it should refrain from entering quotations relating to the securities of this company that has been subject to a trading suspension until such time as it has familiarized itself with the rule and is certain that all of its provisions have been met. Any broker or dealer with questions regarding the rule should contact the staff of the Securities and Exchange Commission in Washington, DC at (202) 551-5720. If any broker or dealer enters any quotation which is in violation of the rule, the Commission will consider the need for prompt enforcement action.
If any broker, dealer or other person has any information which may relate to this matter, they should immediately communicate it to the Delinquent Filings Branch of the Division of Enforcement at (202) 551-5466, or by e-mail at DelinquentFilings@sec.gov.
For further information see the Order Instituting Administrative Proceedings, In the Matter of Today's Man, Inc., et al. Administrative Proceeding File No. 3-13474 and the Order Instituting Administrative Proceedings, In the Matter of Total Film Group, Inc., et al. Administrative Proceeding File No. 3-13474 (May 20, 2009 (May 20, 2009). See also the Order of Suspension of Trading, In the Matter of Today's Man, Inc., et al. File No. 500-1 (Rel. 34-59941)
In the Matter of Michael P. Owens
On May 19, the Securities and Exchange Commission announced the issuance of an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions (Order) against Michael P. Owens. The Order finds that on April 20, 2009, a final judgment was entered by consent against Owens, permanently enjoining him from future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, and Sections 10(b) and 15(a) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, in a civil action entitled Securities and Exchange Commission v. Real Estate Partners, Inc., et al., Civil Action Number SACV 07-1022 AG (RNBx), in the United States District Court for the Central District of California.
The Order further finds that the Commission's complaint alleged that Owens made fraudulent misrepresentations in the unregistered offer and sale of defendant Real Estate Partners, Inc.'s securities and acted as an unregistered broker-dealer.
Based on the above, the Order bars Owens from association with any broker or dealer. Owens consented to the issuance of the Order without admitting or denying any of the findings in the Order, except he admitted the final judgment entered in the civil action. (Rel. 34-59940; File No. 3-13472)
SEC Orders Hearings on Registration Suspension or Revocation Against Sixteen Companies for Failure to Make Required Periodic Filings
Today, the Commission instituted two separate public administrative proceedings against a total of sixteen companies to determine whether the registration of each class of their securities should be revoked or suspended for a period not exceeding twelve months for failure to file required periodic reports (ticker symbols provided where available):
In the Matter of Today's Man, Inc., et al., Administrative Proceeding File No. 3-13473
In the Matter of Total Film Group, Inc., et al., Administrative Proceeding File No. 3-13474
In each of these Orders, the Division of Enforcement (Division) alleges that the issuers are delinquent in their required periodic filings with the Commission.
In each of these proceedings, instituted pursuant to Securities Exchange Act of 1934 (Exchange Act) Section 12(j), a hearing will be scheduled before an Administrative Law Judge. At those hearings, the judge will hear evidence from the Division and the Respondents to determine whether the allegations of the Division contained in the Order, which the Division alleges constitute failures to comply with Exchange Act Section 13(a) and Rules 13a-1 and 13a-13 or 13a-16 thereunder, are true. The judge in each proceeding will then determine whether the registrations pursuant to Exchange Act Section 12 of the securities of the respective respondents should be revoked or suspended for a period not exceeding twelve months. The Commission ordered that the Administrative Law Judge in each proceeding issue an initial decision not later than 120 days from the date of service of the order instituting proceedings. (Rel. 34-59942; File No's 3-13473, 3-13474)
Federal Court Denies Defendant Dr. Zachariah P. Zachariah's Motion for Partial Summary Judgment to Dismiss Commission's Claim Relating to His Trading of CSC Stock
The Securities and Exchange Commission announced that on May 14, 2009, the Honorable Linnea R. Johnson, United States Magistrate Judge for the Southern District of Florida, denied Defendant Dr. Zachariah P. Zachariah's (Zachariah) motion for partial summary judgment to dismiss the Commission's claims relating to his trading of Correctional Services Corporation (CSC) shares. The Court considered the parties' arguments and the evidence presented and determined that there was "ample evidence of disputed issues of material fact that require a full trial to determine."
On May 12, 2008, the Commission filed a civil action against Zachariah and others alleging that Zachariah violated Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 by engaging in illegal insider trading. The Commission's case concerns insider trading in the shares of CSC and IVAX Corp. Zachariah did not move for summary judgment regarding the Commission's claims relating to his trading of IVAX shares. The trial is scheduled for November 9, 2009. [Securities and Exchange Commission v. Zachariah P. Zachariah, et al., Civil Action No. 08-60698-CIV-JOHNSON] (LR-21051)
Proposed Rule Changes
The Commission approved a proposed rule change submitted by the NASDAQ Stock Market (SR-NASDAQ-2009-028) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 reducing fees for the NASDAQ Basic data feeds. Publication is expected in the Federal Register during the week of May 18. (Rel. 34-59933)
The Chicago Board Options Exchange has filed a proposed rule change (SR-CBOE-2009-028) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 and Rule 19b-4 thereunder relating to rebating member dues for certain members. Publication is expected in the Federal Register during the week of May 18. (Rel. 34-59935)
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